Be Disciplined, Not Random

Just in case anybody needed a reminder that stocks are risky, that they don’t always go straight up and that your losses can be real, the cannabis stocks were exactly that today as they dropped 20-50% across the board. Look at this one-month chart that looks like it could be a one-year chart for MJ, one of the main marijuana stock ETFs:

There’s a lot of small cap stocks and not just in the cannabis sector that are making big candle sticks like that as they repeatedly make 10-30% moves intraday.

In many ways, it seems the stock markets remain random number generators. Some random small cap stock might be worth $17 one day. $37 the next. $79 the next morning and then closes at $44. This is not investing. These are random numbers generated by a four-letter symbol machine.

Here’s another example of how random these numbers are right now, as subscribers in the chat room ask me this question that I’ve been getting a lot of lately as so many start up companies come public at huge valuations:

“Cody, If Rivian and LucidMotor go public, how much valuation will you give each of them. I just heard that Rivian is seeking $50B valuation. Lucid claimed to have superior 900 volts electrical system. Both seem almost ready to start pushing products out.”

I have no idea how to value these companies at this point. We’ll need to see some revenue, some gross margin projections and so on. Remember that when we bought TSLA two years ago that after years of struggling to make its factories crank out the Model 3, it was being valued at $30 billion and trading at just over 1x revenues.

Nowadays, many of these start up electric vehicle companies are being valuations that rival Tesla’s at that time but without the revenues or factories or established brands or burgeoning charging networks or anything. Is Lucid Motors, without any revenues or gross margins or unit sales at all yet and currently being valued at close to $10 billion really worth 25% as much as Ford’s current $44 billion valuation?

Rivian is clearly a great company and did a deal with Amazon in which Amazon invested on the cheap in Rivian stock a couple years ago and promised to buy a ton of vehicles from the company which made the equity worth a bunch more than it was when Amazon invested in it and now they can use the value of that equity to pay for all the Rivian vehicles they’re going to buy. I’d like to invest in Rivian at a fair price that includes a margin of safety and lots of potential upside. I don’t know what that means yet though as we need to get more financials and insights into the business model before just I just generate out a random number for you.

Discipline: orderly or prescribed conduct or pattern of behavior.

I often talk about discipline when it comes to investing and trading. Discipline sounds like an outdated concept in this market. But discipline never goes out of style for long. Discipline will be back.

We will do this week’s Live Q&A chat at 9am ET tomorrow (Friday), in the TWC Chat Room or just email us your question to support@tradingwithcody.com.